How Does Private Mortgage Insurance Affect Foreclosure

Foreclosure is not good for anyone. Foreclosure on property occurs when a borrower is not making the payments on the loan. The loan goes into default and then into foreclosure. Foreclosure affects the lender, the borrower, and the economy. Private Mortgage Insurance (PMI) is an insurance product that is sold to the borrower that protects the lender from nonpayment of the loan. You do not receive the monies from the insurer when you can no longer make the payment. The insurer pays directly to the lender each month that you do not make the payment on the note. This insurance will keep your payments made when you experience adverse financial situations. The insurance is called private because it is not government sponsored.

PMI is required by the lender when the purchaser does not have the funds for a down payment of at least 20% of the total cost of the property. Sometimes lenders will require the insurance if the borrower is a great risk because of lower income and a lower credit score. The PMI will be a monthly fee that is added to the mortgage payment and will cost $50 or more. When the credit score improves by timely payments and avoiding any late payments greater than 30 days late, the requirement for PMI can be dropped. The borrower can refinance the mortgage loan and drop the PMI requirement if the equity in the home is 20% or more. If the borrower does not want to refinance he can make application to the lender to drop the PMI because of the equity in the home. With either option, credit history will be a factor in removal of the PMI.

Government mortgage insurance is similar to PMI and is required for government backed loans such as FHA and VA. The considerations for this insurance are similar but not exactly like those of private insurance. The fact is neither of them will prevent foreclosure on the loan if the payments are not made.

The insurance comes into play when foreclosure is started by the lender. Mortgage insurance whether government backed or private will not keep you from the consequences of nonpayment and the resultant default on the note. Sometimes the insurance will pay your missed payments, bring you note current, and allow you to start over with the payments. This will help you save your home if the foreclosure process has not been started by the lender. With or without insurance, if you want to keep your home, make the payments on time and you will avoid these consequences.

You can avoid paying a higher mortgage payment if you put more down on the house. At least 20% is required. When you are in the market for a home you need to decide which option is for you. Invest a little more in the property up front or make monthly premium payments on the loan until you meet the conditions for removal. The monthly premiums may be more than you are willing to pay each month and you may want to wait to purchase your home when you have more saved for a down payment.

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